Two Energy ETFs to Watch

Throughout the first half of Monday's session, stocks tried to build on the previous day's bounce, but afternoon selling caused the major indices to again finish in negative territory. The blue-chip Dow Jones Industrial Average slipped less than 0.1%, the Nasdaq Composite receded 0.3%, and the S&P 500 fell 0.4%. Small-caps showed relative weakness, causing the Russell 2000 to slide 1.0%. The S&P Midcap 400 lost 0.4%. All the main stock market indexes closed near the bottom quarter of their intraday ranges.

The worst aspect of Monday's session was the significantly higher volume that accompanied the losses. Total volume in the NYSE was 7% greater than the previous day's level, while volume in the Nasdaq ticked 10% higher. On closer inspection, the negative volume pattern was even more apparent. As stocks grinded higher Monday morning, turnover was tracking lighter than the previous day's level. It wasn't until the major indices began selling off in the afternoon that volume started to pick up. This analysis of the intraday volume pattern confirms institutions remained on the sell side of the market. Again, we continue to look for at least a solid session of higher-volume gains that might provide the market with short-term support.

In the January 25 issue of The Wagner Daily, we pointed out that the US Natural Gas Fund (UNG) was consolidating above new support of its 50-day moving average. Since then, UNG has remained below its short-term resistance level, and therefore, has not yet triggered for buy entry. However, the pattern in FirstTrust Natural Gas (FCG), an ETF comprised of individual stocks related to natural gas, is looking even better than the pattern of commodity-based UNG. On Monday, we bought FCG on an opening gap down to support of its 50-day MA, as shown below:

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Unlike UNG, which has only recently begun trending higher, FCG has been in a dominant uptrend since March of 2009. Since January 11, FCG has been moving lower, but the ETF has shown considerable relative strength to the main stock market indexes. Now, it has come into key support of its 50-day MA, thereby providing us with a low-risk buy entry into one of the few ETFs whose bullish uptrend has not yet been violated. When the broad market eventually bounces, FCG should outperform to the upside. Nevertheless, because it's a long position, we reduced our share size on the initial entry to just 50% of our normal risk per trade.

From January 20 - 22, the Dow Jones Industrial Average plunged sharply, but settled at major support of its October 2009 high. Throughout the latter half of 2009, pullbacks to key levels of prior support swiftly resulted in buying interest that caused the index to rally, but this has not yet happened. Over the past two days, the Dow has merely consolidated in a tight range, near its January 22 low. Just as price consolidation near the highs is bullish and often leads to new highs, consolidation near the lows is bearish and frequently leads to a breakdown to new lows. If that happens, the next level of major price support is the late-October/early-November lows, about 5% below the current price of the index. Therefore, be on guard for a potential breakdown of more than a few points below the low of the past three days, which could spark another round of selling. The daily chart of the Dow is shown below:

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By Deron Wagner of Morpheus Trading Group

Deron Wagner is the founder and head portfolio manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. He can be found at MorpheusTrading.com.